It is believed by many that only people with a high salary can afford to save, however what really counts the most is how disciplined an individual is and not how big their paycheck is. With a low salary one needs a system and a money management structure that account for lack of willpower to spend too much and set aside a fixed amount of money every month for savings. Without a system, lack of monitoring of small and seemingly insignificant transactions every day results in all the money being spent months the month end.
The 50/30/20 Budget Rule is a proven, universally respected financial planning principle that offers vision, discipline and organization to your finances. The three allocation buckets for your net monthly income, it guarantees not only that your necessary expenses are paid, but also that your personal preferences are funded and and that your long term wealth objectives are always supplied with cash. Be it a 300 dollar, 500 dollar or 1,000 dollar monthly cash flow, you can take absolute control of your income with this method transparency, debt freedom, wealth creation and smart money management is achieved with the simple application of this method.
The 50/30/20 rule works by dividing your gross monthly income (after taxes) into just three easy to remember categories in percentages: Needs, Wants and Savings.
N1 (Needs)00 This category chO out 50% of your Earned Income. It comprises of essential expenses that are necessary for your existence and daily life! For instance, rent of house, monthly groceries, electricity, cooking gas, basic travel expenses, medical insurance, and obligatory loan EMIs.
The second category is Dream and this accounts for 30% of your income. It refers to the money you could comfortably spend on discretionary expenditure and quality of life enhancement items, like eating out, ordering food, going to cinemas, shopping, travel holidays or digital streaming subscriptions.
The last and certainly most important division is the 20% allocated towards Savings and Investments. This amount represents your saving capital, set aside for the purpose of creating an emergency fund, reducing debts more rapidly or investing in slow to grow opportunities, such as Mutual Funds and Pension Funds. If you stick rigidly to these three percentage limits, you know your bills will be paid on time without compromising your standard of living.
To get a practical idea of this utilization rule, we shall see how this rule applies to a monthly in-hand salary of $300( or the local currency equivalent).
Firstly, work out 50% of Needs, which is where we are at $150. This pool must support the rent on your home and the essentials to be bought at the supermarket, bills, and minimal costs for getting about. By allocating all essentials to the $150 there will be assuredly no difficulty in meeting them.
The second step is to take 30% for Wants: in this case, 30% of our $300 budget is $90. This part is used on our personal preferences: an occasional lunch, some expenses on weekend amusements, subscriptions to Netflix or other services, or small shopping endeavors. Budgeting to satisfy our needs avoids lifestyle frustration and greatly facilitates the process.
Finally, allocate 20% to Savings (which amounts to $60 here). Transfer the money out of your primary account immediately after you receive it each month. Saving a consistent $60 each month develops a healthy savings foundation, helps prepare for life‘s financial shocks, and will provide a necessary foundation for long-term compound growth.
Step-by-Step Practical Guidelines For Execution
Pay yourself first: move the 20% savings out of your main checking account immediately upon receipt of salary, to an separate savings account or put it into a direct-debit investment scheme before you pay your bills.
Caps Discretionary Wants If more than 50% is spent because of high local rent, take discretionaries back to below 30% for now until your core 20% boundary is protected.
Build an Emergency Reserve of Liquid Savings: Before taking on aggressive risk in the markets, have at least three to six months of what it costs to live in a high-yield savings account ready to go.
Automate Micro-Investments: Enroll in automatic monthly deposits into inexpensive index funds or regular cash transfers into your bank account so that wealth is built every month without further effort.
In order for the 50/30/20 savings rule to work on a low income you need to use the math, as well as the following 4 daily habits:
First of all keep track of every expense. It is the best to use your mobile device, digital spreadsheet or a specific notebook for this activity. Don‘t forget about daily small expenses which are easily forgotten but can spoil your entire monthly target planning.
The second habit is to make a clear distinction between genuine needs and transient wants. Establish a mandatory 48-hour delay on any discretionary purchase. Two day delay will prohibit impulse buying and allow oneself to determine whether the item is a temporary need or want.
Habit Three: Capping Fixed Overhead Costs. Do your best to keep fixed monthly liabilities to a minimum when living (e.g. your rent on your apartment, or your monthly subscription packs). Less fixed overheads means healthier cash flow and increased financial flexibility when financial pressures hit.
The fourth habit is to focus on increase your earning power over time. It is important to realize that handling the existing money efficiently is different from earning more money. Improving your professional skills, doing some side projects, or searching for better jobs can boost your income. As a result, the 20% can grow much bigger.
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